{"id":4801,"date":"2023-04-13T17:07:00","date_gmt":"2023-04-14T00:07:00","guid":{"rendered":"https:\/\/www.soundcu.com\/?p=4801"},"modified":"2024-02-27T16:30:51","modified_gmt":"2024-02-28T00:30:51","slug":"the-basics-of-retirement-accounts","status":"publish","type":"post","link":"https:\/\/www.soundcu.com\/blog\/the-basics-of-retirement-accounts\/","title":{"rendered":"The Basics of Retirement Accounts"},"content":{"rendered":"
\n\t
\n\t\t\t
\n\t\t\t\t\t
\n\t\t\t\t
\n\t\t\t\t\t

The Basics of Retirement Accounts<\/h2>\n

While everyone knows the importance of saving for retirement, the vast menu of retirement savings plans can be quite confusing. Add in the questions of how they work and how much you should be contributing and it can make your head spin.<\/p>\n

If that sounds familiar, you\u2019re not alone. Federal Reserve System data shows that a quarter of U.S. residents \u2013 some 26% of Americans<\/a> \u2013 have no retirement savings, and 44% don\u2019t feel their retirement savings are on track. Confusion about how the system works is most definitely to blame for at least some of that.<\/p>\n

Nonetheless, don\u2019t panic. We\u2019ve got a rundown on all the most common retirement accounts \u2014 including 401(k)s, 403(b)s, solo 401(k)s, IRAs and Roth IRAs \u2014 and how to use them.\u00a0 It should be just what you need to get you moving in the right direction.<\/p>\n

Employer-Sponsored Retirement Plans <\/strong><\/h2>\n

A 401(k), like similar accounts including 403(b)s, is a\u00a0 qualified employer-sponsored retirement plan. If your employer does not offer a 401(k) or other sponsored plan, you should probably begin saving in a Roth IRA or traditional IRA<\/a>.\u00a0 But if you have access to an employer plan \u2014 especially if your employer offers matching contributions \u2014 that\u2019s the best place to start.<\/p>\n

Many employers offer a matching contribution up to a certain percentage of your salary. For instance, if your employer will match your 401(k) contributions up to 6% of your salary, you should aim to always contribute at least 6%. If not, you\u2019re leaving free money on the table.<\/p>\n

The money you contribute to a traditional 401(k) account<\/a> is pre-tax money, meaning you will not be taxed on that money during the year you earned it (this will show up as a tax deduction, reducing your adjusted gross income for that year). Instead, the money will go into an investment account where it will typically grow over time, and you\u2019ll pay taxes when you withdraw it during retirement. You may also have the option of choosing a Roth 401(k). Here, you\u2019ll contribute post-tax dollars (i.e. money you\u2019ve already paid taxes on), the money will grow tax free and you won\u2019t owe any taxes upon withdrawal.\u00a0 For 2023, the IRS increased the annual 401(k) contribution limit from $20,500 to $22,500. Those 50 or older at the end of 2023 can make a catch-up contribution of $7,500.<\/p>\n

An important thing to remember when considering your 401(k) is that it\u2019s the account you put money into, not your actual investments<\/em>. Once the money is in the account, you are responsible for choosing your investments and actually investing that money. Your investment options can include mutual funds, target-date retirement funds, stocks and other choices depending on your plan.<\/p>\n

What\u2019s a 403(b)?<\/strong><\/h2>\n

A 403(b) plan is similar to a 401(k) plan, but it\u2019s offered to employees of nonprofits as well as to some government employees. As with 401(k) plans, contributions to 403(b) plans are tax deductible, and employers can also offer matching contributions. In addition to investing in many of the same options offered in 401(k)s, 403(b)s have also offered the option to invest in annuities (which provide an income stream in retirement).\u00a0 Only recently has a change in the law started to bring annuities to 401(k)s.<\/p>\n

There are many similarities between these two account types. They have the same contribution limits ($22,500 for 2023, with a $7,500 catch-up contribution for those 50 and over). Both types of plans require you to reach age 59 \u00bd before you can withdraw from them and impose a 10% penalty for early withdrawal. And both can offer Roth options if your employer adds that feature to your plan.<\/p>\n

DIY Retirement Plans<\/strong><\/h2>\n

If you don\u2019t have an employer-sponsored retirement plan (and sometimes even if you do, but have the ability to save more), it\u2019s time to look at IRAs. IRA stands for Individual Retirement Account and there are four different types \u2014 all of which fall under the heading of \u201cself-directed\u201d retirement plans, which is a fancy term for Doing It Yourself. All are accounts you open with a brokerage firm or other investment house, then contribute to and manage over time.<\/p>\n

The original is a traditional IRA. You deposit pre-tax money, this reduces your adjusted gross income \u2014 up to $6,500 for 2023, plus another $1,000 in catch-up contributions for anyone 50 and over. Once invested, the money typically grows over time. And when you withdraw it, which you\u2019re allowed to do without penalty beginning at age 59 \u00bd and must do starting at age 73 in 2023, you\u2019ll pay ordinary income taxes on the withdrawals. If you have a retirement plan at work, you\u2019re only eligible for a traditional deductible IRA if your income is below $73,000 (singles) or $116,000 (married, filing jointly) generally not eligible for a traditional deductible IRA.\u00a0 But you can always open and contribute to a non-deductible<\/em> IRA.\u00a0 The money will still grow tax-deferred over time. And you\u2019ll still pay income taxes upon withdrawal.<\/p>\n

A Roth IRA is basically the opposite \u2014 taxwise \u2014 of a traditional IRA: You pay tax on income before <\/em>you make contributions to the Roth IRA, but you\u2019ll pay no tax on withdrawals of either your earnings or your contributions in retirement. There is a catch. Not everyone (even those who don\u2019t have a work-based retirement plan) qualifies for a Roth IRA.\u00a0 Singles need a modified adjusted gross income of under $138,000 to contribute the full amount and $153,000 to contribute anything for 2023.\u00a0 If you\u2019re married filing jointly income limits begin at $218,000 and phase out completely at $228,000.<\/p>\n

A Word About Spousal IRAs <\/strong><\/h2>\n

If you\u2019re married and have a spouse in the workforce, you can contribute to retirement \u2014 for you \u2014 even if you\u2019re not earning an income yourself by using a spousal IRA.\u00a0 With this account, the working spouse contributes on behalf of the spouse who isn\u2019t earning income. \u201cIt\u2019s the easiest thing to do if you have a spouse and file joint tax returns,\u201d said Nasrin Mazooji of Ubiquity Retirement + Savings. \u201cYou can contribute to an IRA as long as your spouse has income.\u201d Contribution limits are the same as for traditional IRAs and Roths.<\/p>\n

And, If You\u2019re Self Employed?<\/strong><\/h2>\n

A solo 401(k) enables you to get many of the benefits of an employer-sponsored plan without having to work for someone else. Even better, the contribution limits are pretty generous because you can contribute for yourself as both an employer and an employee and also make catch-up contributions. For 2023, the total contribution for this particular account \u2013 not counting catch-up contributions for those age 50 and over \u2013 is $66,000. Want to know more? The IRS details the rules here<\/a>. And just like 401(k)s at many employers, there\u2019s also a Roth option.<\/p>\n

Note:<\/em> You do need an employer identification number for your own business to open a solo 401(k), which you can apply for on the IRS website<\/a>.<\/a><\/p>\n<\/div>\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\n\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

An important thing to remember when considering your 401(k) is that it\u2019s the account you put money into, not your actual investments. Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":13,"featured_media":4802,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","_searchwp_excluded":"","footnotes":""},"categories":[51],"tags":[],"class_list":["post-4801","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-sound-news"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/posts\/4801","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/users\/13"}],"replies":[{"embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/comments?post=4801"}],"version-history":[{"count":1,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/posts\/4801\/revisions"}],"predecessor-version":[{"id":10138,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/posts\/4801\/revisions\/10138"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/media\/4802"}],"wp:attachment":[{"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/media?parent=4801"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/categories?post=4801"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/tags?post=4801"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}